When comparing levered versus unlevered capital structures,leverage works to increase EPS for high levels of EBIT because interest payments on the debt:
A)vary with EBIT levels.
B)stay fixed,leaving more income to be distributed over fewer shares.
C)stay fixed,leaving less income to be distributed over fewer shares.
D)stay fixed,leaving less income to be distributed over more shares.
E)stay fixed,leaving more income to be distributed over more shares.

Question

Quizplus · Accepted Answer

Leveraged capital structures have a higher proportion of debt compared to equity. Interest payments on debt are fixed and remain the same regardless of the EBIT level. This means that as EBIT increases, more income is available to distribute to shareholders, resulting in higher EPS.

When Comparing Levered Versus Unlevered Capital Structures,leverage Works to Increase